Tax Smoothing Hypothesis: A Turkish Case

  • Taner Turan Adana Science and Technology University, Department of International Trade and Finance, Turkey
  • Mesut Karakas Gebze Institute of Technology, Department of Economics, Turkey
  • Halit Yanikkaya Gebze Institute of Technology, Department of Economics, Turkey

Abstract

We tested the tax smoothing hypothesis for Turkey using annual data for the period of 1949-2010. Although our preliminary estimation results imply the existence of the weak form of tax smoothing for Turkey, further tests indicate the violation of exogeneity of permanent government spending, which is a requirement for the tax smoothing hypothesis to hold. Our causality tests indicate that permanent government spending is not exogenous due to the causality running from lagged tax rates to permanent government spending. Therefore, we conclude that our results provide evidence against the tax smoothing hypothesis. Our results are important because the existence of random-walk behavior of the tax rates alone or some preliminary regressions do not guarantee the existence of tax smoothing.


Key words: Tax smoothing hypothesis, Random walk, Co-integration, Beveridge-Nelson decomposition, Kalman filter.
JEL: E62, H21, C32.

How to Cite
Turan T., Karakas M., & Yanikkaya H. (2014). Tax Smoothing Hypothesis: A Turkish Case. Panoeconomicus, 61(4), 487-501. doi:10.2298/PAN1404487T
Section
Original scientific paper